If Narendra Modi, India’s prime minister, seeks an example of a democratically elected leader embarked on radical reform, he could look to Enrique Peña Nieto.True, the latter is president of a far- smaller country, and a richer one – Mexico’s average standard of living is doubleIndia’s, although poor economic performance in recentdecades has narrowed the gap substantially. The two countries’ leaders confront related challenges. Both need to generate market-oriented growth in economies that show a huge gulf between a high-productivity formal sector and a low-productivity informal one. Mr Peña Nieto has embarked on bold reforms. Is his the model to be followed?

In a recent study, the McKinsey Global Institute captures Mexico’s dualism nicely. “There is a modern Mexico, a high-speed, sophisticated economy”, it acknowledges. But there is also a “traditional Mexico, a land of sub-scale, low-speed technologically backward, unproductive enterprises, many of which operate outside the formal economy”. Development means integrating the two.&amp;amp;amp;lt;div class="storyvideonojs"&amp;amp;amp;gt;&amp;amp;amp;lt;div&amp;amp;amp;gt;&amp;amp;amp;lt;p&amp;amp;amp;gt;You need JavaScript active on your browser in order to see this video.&amp;amp;amp;lt;/p&amp;amp;amp;gt;&amp;amp;amp;lt;img alt="No video" src="http://im.ft-static.com/m/img/logo/no_video.gif" /&amp;amp;amp;gt;&amp;amp;amp;lt;/div&amp;amp;amp;gt;&amp;amp;amp;lt;/div&amp;amp;amp;gt;

It is often forgotten that in the 1950s, 1960s and 1970s, Mexico’s economy was highly successful: gross domestic product per head rose at an annual average rate of 3.3 per cent. Then came the debt crisis of 1982 and a lostdecade, a botched privatisation programme, the North American Free Trade Agreement of 1994, the financial crisis soon afterwards, macroeconomic stabilisation, a shift to multi-party democracy and the rise of Chinese competition.Throughout this period, growth was dismal: output per worker has grown at less than 1 per cent a year since 1980.Mexico’s GDP per head (measured at purchasing power parity) was 30 per cent of USlevels in 2012, exactly the sameas in 1990.

For those who believe that opening up to trade is a guarantee of rapid growth, this is a sobering tale: the ratio of trade to GDP jumped from 39 per cent in 1990 to 65 per cent in 2011. Exports to the US rose sixfold under Nafta. Yet the economy underperformed.

Mexico suffers from a “productivity puzzle”.The contrast with other emerging economies is remarkable. McKinsey’s explanation is that, while productivity rose at a compound rate of 5.8 per cent a year between 1999 and 2009 in companies employing more than 500people, it rose at just1 per cent a year in companies employing between 10 and 500people, and fell at a rate of 6.5 per cent in companies employing fewer than 10.The share of the latter in employment also rose in the same period from 39 per cent to 42 per cent, while the share of big companies stayed at 20 per cent and those in between fell from 41 per cent to 38 per cent (See charts).

Whatlies behind the falling productivity and rising share in total employment of small businesses? Why, for that matter, have midsized businesses been so undynamic? McKinsey advancesthree hypotheses.First, companies remain small and informal because the regulatory and fiscal burdens of becoming large and formal are high.The solution is to lower burdens on formal businesses and raise them on informal ones.Second, small businesses lack access to credit.At 33 per cent of GDP, outstanding loans are extraordinarily small. They are also expensive. McKinsey argues that “The unmet capital needs of firms with 10 to 250employees represent75 per cent of what we estimate to be a $60bncredit gap in Mexico.” The solution must include improvements in property rights, legal processes and, perhaps, targeted guarantees.Third, infrastructure, energy costs, supply of skills and quality of governance leave much to be desired. This affects businesses both big and small but makes it particularly hard for small and midsized companies to prosper. The solutions are to upgrade governance at all levels, and deregulate and enhance competition. Public-private partnerships, including foreign capital, should play a role in the supply of infrastructure.

The McKinsey analysis is right, so far as it goes. But it is limited. The informal sector is operating as a sink for Mexico’s excess labour (as is true in India).

Declining productivityin the informal sector is not just a product of what is happening in that sector. It is a result of slow employment growth elsewhere. The informal sector adjusts to the excess supply of relatively unskilled workers unable to find jobs in formal businesses. Since credit to small businesses is so tight, the result is fallingproductivity and real wages.

The government of Mr Peña Nieto is aware of the country’s economic underperformance.It is reshaping the energy sector – among other things, ending the monopoly of Pemex, the state-owned oil company. In telecoms, it is curbing the “dominant position” of Carlos Slim’s América Móvil. It is also reforming labour markets, the tax system (unpopular with payers), education (unpopular with teachers) and competition policy.

This is a bold programme. But will it be enough? After all, the rate of productivity growth needsat least to triple. Since Mexico is already a middle-income country, that will require not just market-oriented reforms but a radical improvement in the quality of state institutions. The informal sector will need to be brought within the ambit of a supportive regulatory and legal framework.Only once these businesses are formalised can they hope to obtain credit and other crucial services.China’s soaring wages offer a new opportunity to Mexico’s export-oriented businesses. But exports alone will not transform economic performance. Dynamic and innovative businesses must emerge in all parts of the economy.Mexico’s past offers a warning; its present offers hope. But it is far from certain that the programme of reforms, albeit necessary, will also be sufficient to generate the much-improved performance the country needs. The further an economy has progressed, the more difficult rapid growth tends to become. That has been true for Mexico for some time. A big part of the answer must be to make the formal sector better and less regulated, and the informal sector better and more regulated.

What is needed is not just a big improvement in policy but also one in governance.This is true in Mexico and India alike. It is what both Mr Peña Nieto andMr Modi promise. Let us now see whether these governments will be able to deliver.

Since 1972, Republicans have moved much further right than Democrats have moved left.By William A. Galston

June 3, 2014 7:16 p.m. ET

Today's political polarization is more than a journalistic trope. It is more intense than at any time in the past century, and it pervades our political system from top to bottom. It feeds legislative gridlock and damages trust and confidence in political institutions. Abroad as well as at home, observers question America's ability to govern itself as the times require.This condition did not develop overnight. Half a century ago, the twoparties agreed on Cold War anticommunism as the core of foreign policy and on a broadly Keynesian approach to economics. Most of the cultural issues that dominate today's landscape and divide the parties were not matters of public conversation.By 1980 this postwar consensus had collapsed. Democratic support for Cold War anticommunism waned in reaction to the Vietnam War. Republican support for Keynesian economics had given way to the supply-side revolution. The country had split over new social issues—notably feminism, abortion and the counterculture. And the civil-rights movement triggeredpolitical realignments in the South and among the white working class in the Northeast and Midwest.All these shifts pointed in the same direction, toward increased unity within each political party and more-intense divisions between them. Today, ideology, policy preferences, partisanship and voting behavior are aligned as never before.

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According to Alan Abramowitz, a political scientist at Emory University, party loyalty has reached the highest level in the history of survey research, and ticket-splitting the lowest. Of self-identified Democrats, 93%voted for President Obama in 2012; 93% of Republicans voted for Mitt Romney, and aboutnine in 10 voters supported members of the same party in the presidential, House and Senate elections. More thanseven in 10 self-styled independents lean toward a political party and vote in patterns almost indistinguishable from more forthright partisans. This partisan unity has assumed geographical dimensions. In the presidential contest of 1976, according to Mr. Abramowitz, 20 states with 299 electoral votes were decided by margins of 5% or less. By 2012, only fourstates with 75 electoral votes were that competitive. Other research has documented the rising number of state governments controlled by a single party, and even the risingnumber of supermajority counties.Which party bears more responsibility for this state of affairs?In Congress, the answer is clear: While Democrats have moved toward the left, Republicans have moved much further right.Among voters, the picture is more complex.In 1972, for example, 29% of Democrats called themselves liberal or very liberal, a figure that rose by 18 points to 47% by 2012. During thosefour decades, the share of Republicans regarding themselves as conservative or very conservative rose by fully30 points, to 76% from 46%. The average Democratic voter moved about half a point to the left on the standard seven-point ideological scale; the average Republican voter moved aboutthree-quarters of a point to the right. Republicans are now a predominantly conservative party, while Democrats remain a coalition of liberals and moderates.On the role of government, Republicans have moved much further right than Democrats have to the left. It is hard to overstate the intensity of Republican sentiment on this issue. Between 1972 and 2012, the share of Republicans who regard themselves as very conservative on taxes and using government to promote jobs and social services soared to 38% from 9%, and the share of economic conservatives overall rose to 80% from 48%.But on social and cultural issues, the picture looks different.In 2012, according to Mr. Abramowitz, "Democratic voters were somewhat farther to the left of center than Republican voters were to the right of center." A recent Gallup survey bears him out.Between 1996 and 2014, the share of Americans supporting same-sex marriagedoubled to 55% from 27%. Among Democrats, support rose to 74% from 33%—an astounding41 points. But it rose among Republicans as well, to 30% from 16%. The parties are further apart on this issue, not because Republicans became more conservative but because Democrats moved more to the left. This is consistent with another Gallup finding: Since 2000, the share of Democrats who regard themselves as liberal has risen more than the share of Republicans who call themselves conservative. In 2000, 44% of Democratsidentified as moderate, 29% as liberal. Today, fully43% call themselves liberal and only36%moderate. At the same time, conservatives rose to 70% from 62% of GOP identifiers.Amid this welter of statistics, onething is clear: The U.S. government has become dysfunctional, and there is a shared responsibility to fix it.Leaders must behave differently, which will not happen unless the people insist on a different kind of governance. We can light a candle or curse the darkness.

Fighters from Russia's Caucasus region have joined the separatists in eastern Ukraine, while Kiev has intensified its efforts to win back control of the region.Just10 daysafter the presidential election there, the conflict is quickly turning into a war. The man with the full, black beardlooks satisfied, sitting on his wooden chair. He is wearing a white-striped baseball cap and his Kalashnikov sits on the table beside him. Fighters refer to him respectfully as "Komandir." His casual hand signals determine who is allowed into the headquarters of the regional administration of Donetsk and who is not. In response to questions, the Komandir answers in Russian, with a strong Caucasian accent.Is he the boss here? "Yes, apparently." But he's not from here? "As you can see." Then, his mobile phone rings and he speaks in a Caucasian language. Is it Chechen? "Why do you want to know, my friend?"After months of obfuscation, Russia's direct involvement in eastern Ukraine is becoming visible.And last week, it became clearer than ever that Russian and Chechen mercenaries are supporting the separatists in Donetsk, fighting side-by-side with Ukrainians against troops sent by Kiev. At first, the presence of Russian fighters was but a rumor, but then, last Thursday, a column of vehicles carrying 34 coffins draped with red cloth left Donetsk heading for the border. Two-thirds of the some 50rebels who died in heavy fighting10 days ago were Russian citizens.Some of the fighters in Donetsk openly told journalists that they came "on the orders of Kadyrov." The Chechen President Ramzan Kadyrov would only say on his Instagram page: "If any Chechen has been seen in the conflict zone, that's his personal business." At the beginning of last week, it seemed as though the troops from Kiev, after weeks of hesitation, might finally be gaining the upper hand.The army was able to quickly regain control of the Donetskairport, which had been occupied by the separatists. But the eastern flank remained open: On the drive from the Russian border to Donetsk, not a single Ukrainian soldier could be seen; at the edge of the city were fighters from the separatist battalion called Vostok, or East, their Kalashnikovs at the ready.

Serious Territorial ConflictThe battalion is now the leading power in Donetsk. It may only consist of a fewhundred fighters, but they are armed with anti-tank guns, machine guns and anti-aircraft weaponry. And what began in April as the occupation of the regional administration building has since become a serious territorial conflict.This week has seen heavy fighting in eastern Ukraine as Kiev launched an offensive against pro-Russian rebels in the area of Sloviansk, north of Donetsk, on Tuesday morning. The move followed an attack on rebel positions in Luhansk, located near the Russian border, on Monday. There were reports of several casualties on both sides. "What is happening in the east is a repeat of the October Revolution," Yuri Lutsenko, an advisor to Ukrainian president-elect Petro Poroshenko, says in Kiev, 600 kilometers (373 miles) away."At the beginning, the barricades were manned by adventurers, criminals and people from the lumpenproletariat who had no work. Just like in Petrograd in 1917. At the beginning, Viktor Yanukovych paid every fighter $400per day, just as the German generals once paid money to Lenin's people. But now, there are mercenaries and Russian weapons."Lutsenko, 49, was a pioneer of the Orange Revolution.Under Prime Minister Yulia Tymoshenko, he twiceheaded up the Interior Ministry. But after Yanukovych came to power, Lutsenko was locked up for "abuse of office," only to be freed in April 2013 following European pressure. Now, he is working for Poroshenko, who will enter office at the end of this week. It is thought that Lutsenko will be tapped to head Ukraine's National Security Council and he is to help develop Poroshenko's Solidarity Party, which had played but a minimal role in Ukrainian politics prior to the May 25 election, into a solid power base.Until then, though, he is working from the offices of the think tank he founded in the Kiev district of Podil. On the wall hangs an oilpainting called "Pershy," The First. It shows an exhausted Ukrainian with his eyes closed as though he is trying to gather what remains of his strength. For Lutsenko, it is symbolic of the Maidan demonstrations, which led to the overthrow of Yanukovych in February.

'A European War' "Keep a close eye on what is now happening in the east," Lutsenko says. "The separatists have long since ceased calling for federalism or for an improved status of the Russian language. They want to divide the wealth of the oligarchs among themselves, in this case, that of billionaire Rinat Akhmetov." He grabs a piece of paper and draws the outlines of Russia and Ukraine. "Putin doesn't want the Donbass region. He has other goals. First, he wants to sow anarchy in the region because it is extremely important for our economy and without it, the Ukrainians will never get back on their feet," Lutsenko says. "And secondly, he wants the separatists to gain so much independence that they will be able to veto any decision coming from Kiev. That would paralyze the state and would mean it was de facto governed from Moscow."Lutsenko leans back, takes a deep breath, and says: "We have no choice. If we abandon Donetsk, Putin will soon be in Odessa. He is in the process of establishing a cordon sanitaire around Russia. And Ukraine is now, just as Poland once was, a buffer to Europe. It is not a local war, it is a European war."And yet, despite the use of artillery and air strikes, Kiev's military does not appear to be able to regain control of the separatist regions.According to Lutsenko, some 12,000 pro-Russian militants are now fighting againstKiev government forces in the area of Donetsk with an additional 5,000 in the Luhansk region. And these men are better organized and better armed than the army, secret service and police. Just on Thursday of last week, the rebels managed to shoot down a National Guard transport helicopter, killing at least 12.The army has no money and no fuel, says Lutsenko, adding that it hardly even exists as a fighting force. They need helicopters for the fight against the separatists, but the generals sold most of them to Africa. The few Russian helicopters that they still possess are poorly armed and can be shot down like balloons, he says."We don't even have any more stun grenades to move against fighters in the city -- we can't go into Sloviansk with tanks."Poland, he adds, has at least sent over a supply of grenades. The Ukrainian National Guard on Wednesday said that it had abandoned a fight in Luhansk after running out of ammunition following a 10-hour battle with pro-Russian militants.The May 25 vote did, however, bring some change: Petro Poroshenko was elected to the presidency with a surprisingly strong result of 54.7 percent, a strong mandate.Even his rival Tymoshenko backed down. She had planned to send 50,000followers onto the streets in order to contest the results, but with a gap of 42 percentage pointsbetween her result and his, accusing him of electoral fraud seemed far-fetched.

Huge Tasks In addition, the election result also disproved Moscow's claim that the country is hopelessly divided.Even in regions such as Odessa or Zaporizhia, places where residents tend to be pro-Russian, 40 percent of the vote went to Poroshenko.But the tasks facing the new president are immense. There is no functioning police force, no tax authority, no effective bordercontrol and no judiciary to speak of. The natural gas ultimatum issued by Russia has expired, though Russian state-owned gascompany Gazprom on Monday allowed Kiev six more days in ongoing negotiations in Berlin. And Maidan is to be cleared and parliament dissolved. On Wednesday, the president-elect met with US President Barack Obama in Warsaw and plans to fly to D-Day commemoration events in Normandy on Friday. His inauguration is scheduled for Saturday. And then he is planning on flying to the Donetsk region, where the military operation is underway."Poroshenko wants to lead them more effectively," says his advisor Lutsenko."He wants to integrate the National Guard, the secret service and the army into a single chain of command." The president is also hoping for weapons, fuel and cheap food from the Americans, calling it a new "lend-lease act" in reference to the aid US President Franklin D. Roosevelt's provided to allies in World War II.But it will be awhile before any such plan takes shape, which is why Poroshenko is currently leaning on Rinat Akhmetov, who employs some 300,000 people, most of them in eastern Ukraine. The oligarch has already said his workers would establish an unarmed civic defense force, but Akhmetov remains in Kiev and is wary of returning to Donetsk.

No Future There, the power is lying on the street, as a Russian adage would have it, and the "Donetsk People's Republic" is doing what they can to harness that power. The 11-floor headquarters of the regional administration, which had become a shelter for both criminals and the homeless since its occupation, was "cleaned up" by the Vostok militialast Thursday, as self-proclaimed "premier" Alexander Borodaiput it. On the same day, bulldozerscleared away the barricades in front of the structure. The time of chaotic revolution has passed, Borodai says. "As of today, this is the official government seat of the Donetsk People's Republic."Most of the shops in the city center remained closed in the days following the battle for the airport, with much of the population shocked by the violence. The referendum held in May sent a clear message to the "fascist junta in Kiev," at least according to Russian propaganda. But now, a war is being fought in their city.People who are opposed to their hometown's transformation into an independent people's republic are only willing to speak in private, "just like in Soviet times," says Alexander, a 30-year-old electrician. A few days previous, he saw a truck filled with "bearded Caucasians" driving through his city, he says. "Why is this riffraff here," he wonders? A father of twochildren, Alexander says he doesn't see a future for his family in the "Donetsk People's Republic."Translated from the German by Charles Hawley

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.